DBRS: BAC’s 4Q Revenue Declines but Good Expense Control with Strong Credit and Balance Sheet

Summary:
• 4Q net income (to common) of $2.7 billion rebounded from a litigation-dominated 3Q, but underperformed relative to 4Q13 due to lower FICC trading as well as the lower loan balance impact on net interest income, mortgage and equity investment income.
• Expense reductions delivered ahead of schedule and credit is performing well.
• DBRS rates Bank of America Corporation’s Issuer & Senior Debt at A (low) with a Stable trend.

In DBRS, Inc.’s (DBRS) view, Bank of America Corporation’s (BAC or the Company) 4Q14 earnings reflected challenges in growing revenue. Expenses were well-controlled, however, while credit performed well and the balance sheet strengthened. These trends are even more pronounced when viewed on a multiyear basis and could signal positive momentum if the Company is able to produce consistent revenue growth from its businesses. Moreover, after 3Q14 which had $6.0 billion in litigation expense (mostly associated with the DOJ settlement) and 4Q13’s $2.3 billion, 4Q14 had a relatively modest $393 million in total litigation expense.

DBRS sees BAC’s primary challenge as growing revenue organically. Total revenues (excluding DVA/FVA) declined 12.3% compared to 4Q13 and 6.2% for the full year 2014. Capital markets revenue continues to be unpredictable while banking revenues could potentially benefit from a stronger U.S. economy and higher interest rates in the near to medium term. Positively, expenses (excluding litigation) have been well-controlled falling 8% over the year as New BAC and LAS cost initiatives took hold and delivered operating leverage.

Asset quality continued to improve with net charge-offs falling to a low 40 basis points of loans. Moreover, other metrics trended positively with the provision for credit losses dropping to $219 million while $660 million of loan loss reserves were released. These good trends also underscore the need for revenue momentum as DBRS sees credit as having likely bottomed and therefore provisioning needs will increase in 2015. Also relating to risk, DBRS notes that average trading-related assets in Global Markets were up 3.8% from 4Q13, but average VAR declined 30% to $51 million in the same period.

Demonstrating the strength of its global banking franchise, in 2014 BAC maintained strong positions in investment banking league tables while growing client investment assets, credit card accounts and balances while maintaining a substantial deposit base.

BAC’s financial profile remains solid with growing liquidity. Specifically, the Company’s estimated fully phased-in Basel III Common Equity Tier 1 ratio was 10.0% under the standardized approach (9.6% under the advanced approach), and BAC reported an approximate supplementary leverage ratio of 5.9% at the holding company-level and 7.0% at the bank level. Moreover, LCR is at 110% at the parent and over 90% at the bank level and time to required funding extended to 39 months. DBRS also notes that long-term debt again declined in 2014 to $243 billion with well-laddered future maturities.

DBRS rates Bank of America Corporation’s Issuer & Senior Debt at A (low) with a Stable trend.

Note:
All figures are in U.S. dollars unless otherwise noted.